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30 Aug 2022
BY Michael Reifarth

Contributed tax capital, revisited

Contributed tax capital (“CTC”) is a term that is defined in the Income Tax Act, 1962 (the “Act”) and that represents a notional amount that is available to be transferred to shareholders, typically as a capital distribution, in respect of the particular class of share from which it arose.


The CTC of a class of share issued by a company is broadly determined as the consideration for the issue of the shares in that particular class, less certain determined repayments or transfers of CTC to shareholders.


The definition of CTC has undergone certain refinements in the previous and current legislative amendment cycle in an attempt to curb avoidance concerns of National Treasury. These refinements are contained in the Taxation Laws Amendment Act, 2021 (“TLAA”) and the draft Taxation Laws Amendment Bill, 2022 (“ DTLAB”).


Due to the impact of the amendments of the 2021 legislative cycle as contained in the 2021 TLAA, the entry into force of the 2021 amendments was set as 1 January 2023 in order to give National Treasury and stakeholders additional opportunity to deliberate on the effect thereof and to make any further necessary refinements.


These refinements are contained in the 2022 DTLAB. The proposed effect thereof is that proviso (i) and (ii) to the definition of CTC as contained in the 2021 TLAA will be removed and replaced with a proposed new proviso which will be deemed to have come into operation on 19 January 2022.


In terms of the proposed new proviso, an amount transferred by a company will not constitute a transfer of CTC unless all shareholders of that particular class, to which transfers are made within a 91-day period before or after the transfer of CTC to a particular shareholder, are allocated a proportionate amount of CTC.


It therefore appears that it will be compulsory that all shareholders of a particular class of share, who receive a CTC transfer within the relevant time period, receive a proportionate transfer of CTC.


An existing receipt of CTC by a shareholder may subsequently become tainted in the hands of the shareholder if a disproportionate amount is transferred to other shareholders in that class within the stipulated timeframe. This may give rise to potential dividends tax, penalties and other adverse implications for the shareholder. It should also be considered if it may result in a secondary liability for the dividends tax not withheld by the company upon making the initial distribution.


The proposed amendments therefore add a further layer of complexity and administration for shareholders and companies alike, with shareholders possibly requiring formal assurance from companies that all transfers of CTC are made within the framework of the new proviso set out above.


Further complications may also arise, such as where returns of CTC are received and accounted for as such by a shareholder in a particular year of assessment, with such return of CTC becoming tainted after that year of assessment.


Lastly, returns of CTC made subsequent to 19 January 2022 and prior to the issue of the 2022 DTLAB would also require careful analysis due to the effective date of the proposed legislation, if promulgated in its current form.


As this is draft legislation the practical difficulties will be pointed out to SARS and National Treasury.

 

Michael Reifarth
Tax | Executive
mreifarth@ENSafrica.com

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